Homebuilders See Record Bearish Bets on Shaky Recovery: Options

Jun 18, 2014 4:23 am ET

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June 18 (Bloomberg) -- Someone thinks the housing rebound is built on shaky foundations.

A record 180,000 puts traded on the SPDR S&P Homebuilders exchange-traded fund on June 11, according to data compiled by Bloomberg. The contract with the highest ownership pays off in the event of a 20 percent slump by December in the ETF tracking stocks from DR Horton Inc. to Williams-Sonoma Inc.

Prospects for rising interest rates and an uneven recovery in the housing market have hurt returns this year, sending the SPDR Homebuilders ETF down 3.3 percent. While economic data yesterday showed that builders broke ground on 1 million U.S. homes in May, permits, a proxy for future construction, decreased because of fewer applications for condominiums and apartment buildings.

“There are still a lot of reservations held about homebuilders,” Andrew Wilkinson, chief market analyst at Interactive Brokers LLC, said in a phone interview from Greenwich, Connecticut June 16. “It may not be a surprise that by the end of the year, home-price gains may have run their course.”

In two transactions worth about $2.7 million, 65,000 puts on the ETF with an exercise price of $26 expiring in December changed hands on the Philadelphia options exchange, according to data compiled by Bloomberg. The trade was probably initiated by a buyer betting on a decline, according to Wilkinson.

ETF Flows

Rising concern over the housing market has led investors to withdraw money from the homebuilders fund for 13 of the last 15 weeks. About $104 million was removed last week, the most since March, data compiled by Bloomberg show. The ETF, which has a market value of $1.5 billion, climbed 0.4 percent to $32.20 yesterday.

“This could be a play on a weaker economy,” Fred Ruffy, a Chicago-based senior options strategist at Trade Alert LLC, said by phone June 16. “It could be playing a rise in interest rates too, because housing is so sensitive to changes.”

The Federal Reserve will probably raise its benchmark interest rate faster than money-market investors expect, according to a majority of economists surveyed by Bloomberg. Eurodollar futures, the world’s most actively traded short-term interest-rate contract, are underestimating the pace of tightening over the next two years, according to 55 percent of economists in the June 12-16 survey, which drew 56 responses. Fed officials conclude two-day meeting in Washington today.

Getting Pummeled

Low volatility in the equity market has suppressed options prices, making it cheaper to finance contracts that can protect against stock declines, according to Michael Purves, chief global strategist and head of equity derivatives research at Weeden & Co. in Greenwich, Connecticut.

“You’d have to have a very bearish thesis that the homebuilders are just going to get pummeled,” Purves said by phone June 16. “If this investor was long a ton of homebuilders’ stock, it probably makes sense to hedge it.”

The Chicago Board Options Exchange’s Volatility Index, which gauges the cost of options in Standard & Poor’s 500 Index companies, fell 4.7 percent to 12.06 yesterday. The gauge reached a seven-year low earlier this month.

For Paul Zemsky, head of multi-asset strategies at Voya Investment Management LLC, recent housing data is a sign of weakness in the broader economy. The number of housing starts last month was in line with the median forecast of economists surveyed by Bloomberg, a Commerce Department report showed yesterday. Permits decreased 6.4 percent to a 991,000 annualized rate.

“The starts and permits were disappointing,” Zemsky said in a phone interview from New York. Voya oversees $220 billion. “While these numbers weren’t a disaster, they weren’t a big improvement. We need to see these numbers improve soon.”